Contagion fears reemerged despite confirmation of the EU-IMF deal to Greece over the weekend. While European leaders had hoped the huge amount of the rescue package (110B euro over 3 years) should eased market worries over sovereign crisis in the 16-nation region, investors were obviously unconvinced that the problem would be resolved. European stock markets tumbled, selloff of government bonds resumed with yields on 2-year government bonds surging +208.8 bps, +87.5 bps and +21 bps in Greece, Portugal and Spain respectively whilst 10-year yields rising + 60.8 bps, +40 bps and +7 bps respectively.

ECB President Jean-Claude Trichet announced the central bank will accept Greek bonds as collateral at whatever rating until 'further notice' as a means to prevent Greece from dragging down the euro. This was a reversal of the ECB's position in January that the central bank would not relax lending rules for any country. The action suggests that further downgrades in Greece's credit rating are likely. We worry that the President may have to relax rules further for other countries such as Spain and Portugal.

In Greece, workers are protesting against the 30B-euro austerity measures agreed by Prime Minister George Papandreou in return for a bailout. Unions occupied the Acropolis and shut down schools and hospitals while some airlines cancelled their flights. There is high risk that the country may not be able to implement the planned deficit reduction successfully.

World markets slumped with DJIA and S&P sliding -2% and -2.4% respectively.

Commodities fell sharply amid loss in risk appetite. WTI crude oil plummeted -4% and closed at 82.74. The front-month contract declined further after market as a report showed that Oil inventories at the Cushing, Oklahoma, surged to a record.

According the industry-sponsored API, crude oil inventory surged +3 mmb in the week ended April 30. Of the huge build, +1.7 mmb was contributed by Cushing, Okahoma, a hub where WTI crude was delivered. Gasoline and distillate stockpiles also rose, by +1.5 mmb and +1.4 mmb, respectively. The readings signaled supply in the US remains ample.

Weekly change in inventory as of 30/04/10
Market Expectation

Crude oil
+1.96 mmb

+0.20 mmb

+1.70 mmb
+2.94 mmb

Comparison between API and EIA reports:


API (Apr 30)
EIA (Apr 30 )

Forecast (using API's inventory level)

Crude oil
+3.00 mmb
362.7 mmb
+5.34 mmb
+4.18 mmb
363 mmb

+1.50 mmb
223.3 mmb
+0.66 mmb
223 mmb

+1.70 mmb
150.6 mmb
+1.36 mmb
-1.22 mmb
151 mmb


API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Gold tumbled after soaring for 5 consecutive days. The benchmark contract plunged to as low as 1166.9 before closing at 1169.2, down -1.19%. The yellow metal had risen to a 5-monht high at1192.8 earlier on Tuesday. The decline was attributed to USD's strength against major currencies and liquidation of previous long positions. Despite the drop, gold still outperformed others in the precious metal complex as silver, platinum and palladium plummeted 5.30%, -2.45% and -6.00% respectively. We believe safe-haven demand amid debt contagion helped support gold price.

Spread between 10-year and 2-year US government bond yield dropped -19 bps from April's high and -26 bps from a record high of 2.9102 as of May 4. Surge in demand for 10-year US government bond pushes yields lower and signals less inflationary fear and lower risk appetite. Both are negative for gold. We advise investors to pay close attention to the yield curve. If there's further flattening, gold may be under further pressure in the near-term.